Archive article from The Socialist Issue 319
Will There Be A Recovery?
CAN US capitalism pull the world economy out of its present stagnation? Japan has been stuck at near-zero growth for over ten years.
France, Germany, Italy and other euro-zone countries are in recession. Whole regions of the under-developed world are paralysed by slump.
Higher growth in the US and a year-long rise is share prices, however, have encouraged media speculation that a US recovery is under way. US growth, it is claimed, will revive the world economy.
It is still not certain that a US recovery is under way - or whether the unprecedented loss of jobs (nearly three million since Bush came to office) has been halted. But even if it were so, can US capitalism bring about an international recovery?
LYNN WALSH, editor of Socialism Today, looks at the world economy today.
THE BOOMS of the 1980s and 1990s were both driven by frenzied international financial speculation. They have left deep problems for capitalism, and now form a massive barrier to a new, sustained economic upswing in the world economy.
There is massive overcapacity (of 30% or more) in major industries like cars, steel, textiles and clothing, chemicals, etc, and also in many high-tech sectors. This has slowed the rate of price increases almost to zero, with deflation (absolute price decreases) in Japan and Germany.
Overcapacity has cut the profits of the multinational corporations - leading, paradoxically, to investment in additional production capacity in 'low cost' countries like China. This has further added to overcapacity and overproduction, depressing prices even more.
The exploitation of ultra-cheap labour in China and elsewhere has led to massive job losses and the lowering of wages in the US and other advanced capitalist countries. This has further cut the market for capitalist goods - partly counteracted by increasing reliance on credit, though that only stores up even bigger problems for later.
Globalisation equals intensified exploitation of the world working class, poor farmers and the dispossessed by the big multinationals and banks. This pillage has been especially intense in the under-developed countries.
During the 1990s, 54 countries became poorer (as measured by per capita GDP). Since 1960 the gap between the world's poorest 20% and the richest 20% has more than doubled. Over 2.8 billion people live on less than $2 a day.
Reaction to 'free trade'
Grotesque poverty and growing inequality underlie the social collapse and armed conflicts now affecting scores of the poorer countries. The social framework within which the capitalist economy operates is breaking down, undermined by unchecked 'free-market' policies.
More and more mass movements are erupting against the western multinationals and their local allies, the current strike wave in Nigeria being a notable example (see page 9).
The 'free-trade' regime imposed on the world by the US and other western powers is also provoking a reaction. At the recent conference of the World Trade Organisation (WTO) at Cancún, Mexico, 22 countries led by Brazil rebelled against the package presented by the US and the European Union.
The Big Two wanted to keep their own agricultural subsidies, worth $80 billion a year, while forcing third-world countries to open their markets to food imports.
The US and EU also want to impose rules on patents and 'intellectual property rights' relating to pharmaceuticals, software, films and music, etc, which are really a form of protection that would impose multi-billion dollar charges on the poorer countries. There was no agreement at Cancún, and the WTO is in disarray. At the same time, serious trade disputes continue between the US and EU.
The debts of many countries are again ballooning as a result of stagnation and decline. Last month, Argentina, after failing to make a $3 billion loan repayment, demanded additional loans from the IMF - but rejected any more of the austerity measures (cuts in social spending) usually imposed as the price of a 'rescue' package.
Fearing further upheavals after the wave of general strikes last year, the IMF quickly conceded another $21 billion of loans.
Straight away, the recently elected Brazilian government of Lula da Silva and the Workers' Party demanded better terms for their IMF loans, and other countries will soon be doing the same.
On top of these global economic problems, the aggressive, interventionist policy of US imperialism is aggravating instability. The Bush regime's doctrine of 'pre-emptive' war has prompted many states to step up their military spending.
The repercussions of the invasions of Afghanistan and Iraq have already created a much more volatile situation that will inevitably impact on the world economy.
Bush boasted that the 'liberation' of Iraq would mean cheap oil, for example. However, the last meeting of the OPEC oil producing states decided to cut back production, which may push the price significantly above the current $30-a-barrel level. This was a warning to the US that the presence of a representative of Iraq's US-created Governing Council will not give the US a free hand to manipulate OPEC.
Shocks and upheavals
EVEN IN periods of stagnation, capitalism's short-term business cycle of boom and recession continues to operate. It is possible, though not certain, that the US is edging towards a recovery.
Even weak and erratic growth in the US, given its decisive position, could help revive growth in some important sectors of the world economy. But it seems unlikely that there will be a generalised, prolonged upswing in the world economy.
Worldwide, the structures of capitalism are crumbling and in some cases collapsing. Mass movements are growing everywhere against the system's insecurity, poverty and oppression. Under such conditions, any recovery is likely to be weak and short-lived - and give way to further economic shocks and social upheavals.
One immediate problem for US capitalism is its growing debt to the rest of the world. Its huge trade deficit, now running at around $500 billion a year (5% of GDP), has to be financed by an inflow of capital from abroad.
Its $2.5 trillion accumulated debt (25% of GDP) to foreign governments and investors also depends on foreign capital. Though lower than during the nineties boom, the continued inflow has played a big part in helping the US to avoid a major slump. But this process is unsustainable.
Recently, the governments of Japan and China have been buying US treasury bonds and dollars. Japan wants to prevent a sharp fall in the value of the US dollar, which would mean a corresponding rise in the yen.
That would make Japan's exports more expensive and could provoke a new recession there. China is pumping capital (amassed from its huge trade surplus with the US) into the US to support its main export market. A slump in the US would also be a disaster for the Chinese economy.
This can't go on forever. Despite large-scale financial intervention by Japan and China, the dollar has continued to decline. So far its descent has been gradual. But world capitalist leaders are extremely fearful.
It is possible that at a certain point the dollar could slide precipitately - which would more than likely provoke a violent convulsion in the world monetary and financial system.
"Overextended, Overbought, Overdone"
DESPITE JITTERY ups and downs, share prices worldwide have been on the rise over the last year. Since sinking to a seven-year low in October 2002, the global share-price benchmark has risen 36%, according to the Financial Times World Index.
Even in the hi-tech sector, the worst hit when the bubble burst in 2000, share prices have recently begun to climb again. In Britain, the Financial Times index of the top 100 companies appears to be holding up above the 4,300 level. Does this mark a real recovery in the world capitalist economy? Or is it merely a speculative mirage, conjured up by wealthy speculators' greed for profits?
For big business and many financial analysts the stock exchange is the mother of all economic indicators. A steady rise in share prices is seen as a magic sign of economic recovery.
Never mind the irrational, speculative nature of financial markets, starkly exposed by the bursting of the 1990s bubble three years ago. Never mind the fact that, during the nineties boom, the US stock exchange siphoned more money out of the real economy than it put in through new investment.
In pursuit of 'shareholder value', many companies - which means ultimately their workers and consumers - actually subsidised shareholders. They bought back a proportion of their own shares to push up the value of those still being traded, borrowing money to pay for these buy-backs and for new investment.
Wealthy investors, who made stupendous gains during the 1990s boom, are now desperate to put their money back into shares. When world-wide interest rates are at historically low levels - which means a meagre return on cash savings and government bonds (currently 3.9% on US 10-year Treasuries) - they hanker after another 'bull' run on the stock exchange, a return to the days when they could make 15% or 20% a year and often much more from buying and selling soaring shares.
Their greed makes them eternally optimistic, seizing on any early symptoms of recovery as a signal to get back into shares. The latest mini-surge in share prices was triggered by a few recent signs of growth in the US economy - by no means a sustained trend yet.
"Faith in economy lifts US markets [stock exchanges]", reported the New York Times on 13 September. "Stocks rose as investors' optimism for faster growth in the economy and earnings [=profits] persisted even though reports showed a drop in consumer confidence and a smaller-than-expected increase in retail sales."
UNLIKE MANY wealthy speculators, the more sober capitalist commentators are still very cautious about the prospects of a new upswing. Commenting on the recent rally on Wall Street, the world's dominant stock exchange, Vincent Boland notes that it "coincided with an earnings [= profits] acceleration, which may now be over." (Financial Times, 11 October)
This year's rise in corporate profits, on average 50% faster than 2002, is mainly the result of 'cost-cutting', that is purging jobs and cutting workers' wages. But this cannot last indefinitely.
On the other hand, given worldwide overcapacity in all major industries and stagnant growth, big business has no incentive for major new investment and expansion of production, the key to sustained economic growth. Profits are likely to fall, says Boland, and what will happen to shares then? "Analysts say there is a degree of unjustified euphoria in the market, particularly since the best-performing stocks are the riskiest, such as technology..."
Deborah Hargreaves, also in the Financial Times (11 October), gives a similar warning about the London stock exchange. "While investors have already priced in a fairly substantial recovery in corporate profits" - they are already paying higher prices for shares in anticipation of higher company profits to come - "their confidence has not yet been borne out by companies.
"Directors remain cautious about the outlook, reflecting previous false dawns and the difficult trading environment of recent years... hard facts indicating a sustained corporate comeback are yet to materialise." Investors, in other words, are counting their chickens before the eggs are hatched.
ONE HARD-nosed Wall Street analyst recently sounded a much blunter warning to investors: "You are overextended, overbought, overdone. You have no juice left on the upside." (International Herald Tribune, 25 Sept)
Even after the huge share-price falls from the 1999 peak, shares remain hugely overvalued. Share values are usually measured by the so-called price/earnings (P/E) ratio. This is the relationship between the price of the share and company profits ("earnings") per issued share.
In five previous post-1945 troughs, the P/E for US shares fell to 10.1 on average; in the three deepest recessions, 1975, 1980, and 1982, the P/E fell to 7.4 on average. However, at the most recent trough, last October, the P/E was 29, three times higher. (USA Today, 10 Oct). Share prices were out of all proportion to current company profits.
Another measure of share values is relationship between the total value of all shares ('stock market capitalisation') and the total value of all goods and services produced within an economy (the gross domestic product, or GDP).
Peter Temple (Financial Times, 11 Oct) gives the figures for the US. Over the last eighty years, from the 1920s to the 1990s, the stock market/GDP ratio averaged about 50% to 60%. At stock market peaks, like 1929 before the great depression and 1972 before the oil shock and slump, the ratio rose to 90%, typically falling to about 33% of GDP in the troughs. At the height of the 1990s bubble, the ratio hit 160% - three times the historic average and twice the 1929 peak!
Currently the US ratio is 115% of GDP (while the British ratio is 118). Bringing share prices back into line with the historical average would mean a further fall of 50%, bringing another wave of massive losses for investors.
This is a painful 'correction' that looms for capitalism in the next few years. The current stock exchange 'rally' is already reproducing aspects of the 1990s bubble. But this jumpy 'bull market' will not run very far before its strength is tested by new economic shocks.
Mortgaged To The Hilt?
BOTH US and British capitalism have been kept afloat by consumer spending. This is a far bigger source of demand for goods and services than business investment or government expenditure. In both cases, consumer spending rests on an unprecedented mountain of debt.
This has been encouraged by low interest rates. Spending has also been buoyed up by housing bubbles. The situation cannot be sustained.
In Britain, the average household now owes 123% of its annual income in consumer debt. The lowest interest rates for 48 years (3.5% compared to 6% in early 2001) has encouraged borrowing.
In August this year, credit card borrowing was up 13.7% over the previous year. Total debt, including mortgages and consumer debt, is running at about £9 billion a month.
The housing boom has fed through into consumer spending. House prices have increased 150% since 1995, and jumped 25% in 2002.
"Buoyant mortgage lending also fuels consumer spending," comments The Economist (23 August). "Households are continuing to turn some of their housing wealth in to cash. Such mortgage-equity withdrawal - borrowing secured on but not invested in housing - has amounted to a hefty 7% of disposable income in recent months.
"Much of this has occurred through people taking out bigger loans when they re-mortgage their property. In July, re-mortgages amounted to almost £11 billion, nearly half of all mortgage lending."
House price inflation is slowing, however, and the Bank of England predicts that it will halt in the coming year. Some commentators predict a 'hard landing', that is, an absolute fall in prices. The bursting of the housing bubble will inevitably weaken consumer spending. In any case, borrowing has reaching saturation point. Some people are now borrowing money to make repayments on previous debts.
Any reduction of income, through less overtime, unemployment, etc, can make it impossible for people to keep up their repayments. Interest rate rises could make the burden of debt intolerable.
One way or another, the debt-driven consumer boom is reaching its limits, raising a big question mark over Gordon Brown's promise of sustained economic growth in coming years.